- Taxes
ByKen Clark
Updated on December 7, 2022
Reviewed by
Ebony J. Howard
:max_bytes(150000):strip_icc()/Office2-EbonyHoward-bfcf94f429a1438081fbe922661b538c.jpg "What Is a Tax Carryforward? (1)")
Reviewed byEbony J. Howard
Ebony Howard is a certified public accountant and a QuickBooks ProAdvisor tax expert. She has been in the accounting, audit, and tax profession for more than 13 years, working with individuals and a variety of companies in the health care, banking, and accounting industries.
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Fact checked byHilarey Gould
In This Article
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In This Article
- How a Tax Carryforward Works
- Examples of a Tax Carryforward
- Types of Carryforward Losses
- Requirements for Carryforward Losses
- Frequently Asked Questions (FAQs)
:max_bytes(150000):strip_icc()/taxcarryforward-c9c7776458a74040b9172092ae1e5489.jpeg "What Is a Tax Carryforward? (2)")
Definition
A carryforward is a provision in tax law that allows a taxpayer to apply some unused deductions, credits, or losses to a future tax year. The IRS and some states allow carryforwards, sometimes referred to as tax loss carryforwards, net operating loss (NOL) carryforwards, deduction carryforwards, or credit carryforwards.
Key Takeaways
- A portion of some tax deductions and tax credits can go unused because these tax breaks have dollar limits as to how much a taxpayer can claim.
- A tax carryforward lets taxpayers claim the unused portion of these deductions, losses, and credits in future tax years if they cannot do so in the current tax year.
- Not all credits and deductions have carryforward provisions.
- The most common tax perks that enjoy carryovers include the adoption tax credit, the charitable contribution itemized deduction, 529 plan deductions at the state level, and capital losses.
How a Tax Carryforward Works
A tax carryforward is when a taxpayer can apply some unused tax deductions, credits, or losses to a future tax year. It's a tax break that is meant to help people and businesses reduce their tax liability.
- Alternate name: Tax loss carryforwards, net operating loss carryforwards, deduction carryforwards, credit carryforwards
A tax carryforward is basically what it sounds like: You can carry forward losses or excess amounts over the limits set by the IRS into future tax years to reduce your taxable income or your tax bill. It's one way to help people who suffer financial losses or who contributed a lot of money to something.
Examples of a Tax Carryforward
The New York Times reported in 2016 that former President Donald Trump claimed $916 million in losses in 1995, and federal tax carryforward laws likely allowed him to spread out those losses over 18 years, eliminating or reducing his tax liability along the way.
This is just one example—and may be extreme and uncommon—but the ability to spread out losses does exist to help businesses and even individuals endure difficult times and recover more quickly.
Here's a more common example: A state might limit deductions on Section 529 plancontributions to $5,000 for a given year, so a taxpayer's $8,000 contribution would be only partially deductible. The additional $3,000 could be deductible in a later year, however, if the state offered a tax carryforward provision on Section 529 deductions.
Note
A number of states offer Section 529 contribution deductions and also offer carryforward provisions on excess amounts. Speak to afinancial advisor or contact the appropriate government agency in your state about carryforward provisions there.
Taxpayers can increase the total amount of what is deductible over a longer period of time by carrying forward contribution amounts in excess of their state's limit.
Types of Carryforward Losses
The most common federal carryforward provisions are investment losses classified as "ordinary losses," as opposed to long-term losses.
A carryforward is also available for charitable donations that exceed the annual limit.
Note
Some tax carryforwards have no time limit and can be used as long as the taxpayer is alive. Other tax carryforwards expire after just a few years, depending on eachcarryforward rule.
The federal adoption tax credit is nonrefundable. It can eliminate any tax you owe the IRS, but you won't receive a refund for anything that's left over. You won't lose any of the balance, however, because any unclaimed/unused portion of the credit can be carried forward for up to five years.
Capital losses can be carried forward on your federal return as well. You can deduct up to $3,000 a year in capital losses that exceed your capital gains, and carry forward any balance to a future tax year.
Requirements for Carryforward Losses
The IRS limits what may be deducted to determine if a taxpayer has a net operating loss, which occurs when deductions exceed income. Any of the following are excluded when determining losses:
- Any deduction for personal exemptions prior to 2018
- Exclusion of gains from the sale or exchange of qualified small business stock, typically allowed under IRS Section 1202
- Nonbusiness deductions in excess of nonbusiness income
- The net operating loss deduction
- The domestic production activities deduction
Frequently Asked Questions (FAQs)
How do tax loss carryback and carryforward procedures work?
Tax loss carrybacks allow businesses to deduct losses from thee current year from the prior year's profits. The U.S. does not allow carrybacks at the federal level, but some states allow them at the state level. Carryforwards are when you can apply tax losses from the current year to future years.
Who can use a tax loss carryforward?
Individuals and businesses can use tax loss carryforwards.
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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
IRS. "Publication 536 (2021), Net Operating Losses (NOLs) for Individuals, Estates, and Trusts."
The New York Times. "How a Simple Tax Rule Let Donald Trump Turn a $916 Million."
BlackRock. "Take Advantage of Your State Tax Benefits."
IRS. "Topic No. 607 Adoption Credit and Adoption Assistance Programs."
